In our previous articles that can be read, here , here, Here, here and here, we seriously question the assumptions used by some of the big pension funds. This is an issue which has been discussed but nothing has been rectified. This is the next disaster waiting to happen.
Private companies can use return assumptions which are considered “reasonable.”
To my knowledge in the late 1990s reasonable would have been 15%. Some pensions are lowering their assumptions to “only” 7%. Considering that the 10 year is at 2%, and equity markets are fairly valued, this is nearly impossible. However the biggest problems lie with the public pension funds.
Yarra Square Partners returned 19.5% net in 2020, outperforming its benchmark, the S&P 500, which returned 18.4% throughout the year. According to a copy of the firm's fourth-quarter and full-year letter to investors, which ValueWalk has been able to review, 2020 was a year of two halves for the investment manager. Q1 2021 hedge fund Read More
CALPERs in particular stands out since it is the biggest pension fund in the country. The fund expects returns of 7.7% annually for the next 10 years. Some pension funds assume that they can magically beat the market by investing more money in alternative investments. Alternative investments many times means hedge funds. The average hedge fund returned 2% last year. On average there is no evidence that hedge funds outperform the market.
So how did CALPERs do in 2011?
The fund posted a 1.1% return on its investment portfolio in 2011, despite one of the greatest Government bond rallies in recent memory.
According to the LA Times
During the 2011 calendar year, CalPERS lost 7.95% on its public equity investments, lost 2.29% on its hedge fund investments, earned 12.38% on bonds and earned 9.92% on real estate.
This is not just an annomoly. CALPERs did well in 2010, and 2011 because equities did fantastic.
As the article notes:
CalPERS’ 2011 return was well off the 12.6% return for 2010 and 12.1% for 2009.
However in 2008, the fund lost a tremendous amount of money.
The article states that the fund was down 23.4% for the year. The reason was because equities were down close to 40% in 2008.
Public pensions are a huge problem, and the taxpayers are on the hook for absurd assumptions.
My solution is some type of return based on equity valuations and the 10yr yield. This would not be perfect and funds would be able to have a higher (or G-d forbid lower assumption), but it is the best solution which I have thought of.